"The Korean government must be commended for the pace and ambition of its value-up reforms to date. That said, it will be difficult for the mindset of boards that have grown accustomed to decades of family control to change overnight."
Joe Bauernfreund, Chief Executive Officer and Chief Investment Officer of UK-based Investment Company, Asset Value Investors (AVI), offered this assessment of Korea's Value-up programme in a written interview with Chosun Biz on March 24 (local time).
Founded in 1985, AVI is a global value investment firm headquartered in London. It primarily invests in family-controlled holding companies and asset-rich companies trading below net asset value (NAV), and pursues an engaged strategy aimed at improving corporate governance and unlocking hidden value through active engagement with management. In particular, it has built up significant know-how over the past decade by leading governance reform campaigns involving dozens of undervalued companies in Japan.
Bauernfreund first gave high marks to the series of institutional reforms introduced since the launch of the Lee Jae-myung administration. In less than a year, three amendments to the Commercial Act have been passed, while reforms to dividend income taxation and a ban on conglomerate dual listings have also been pursued, clearly demonstrating the government's policy determination to address long-standing structural problems in Korea's capital markets.
At the same time, however, Bauernfreund pointed out that the numbers show there is still a long way to go. "With 66% of KOSPI-listed companies still trading below book value, and 35% below 0.5x, the numbers make clear how much work remains," he said, adding that "this level of undervaluation reflects years of accumulated shareholder value destruction through mechanisms that reforms are only beginning to address." In other words, while the direction of reform is the right one, the distrust and valuation discount built up in the market run correspondingly deep.
He said Japan, where AVI has invested for many years, offers useful lessons in gauging what lies ahead for Korea. In Japan as well, corporate governance reform began in earnest with Abenomics in 2012, but it took far longer for genuine cultural change to be felt at the company level.
"For the better part of a decade, genuine cultural change at the company level was slow-going," Bauernfreund said. "It was not until the TSE's 2023 directive that boards began to act with more urgency, and their mindsets started to shift."
He expects Korean companies to go through a similar process. That is because passing laws and changing a company's internal decision-making culture are two very different things. In Bauernfreund's view, attitudes toward minority shareholders, embedded over decades under family-controlled structures, will not change overnight. Ultimately, that means Korea's Value-up programme now faces a more important challenge beyond legislative reform: cultural reform.
Bauernfreund described the recent responses of Korean listed companies as "mixed." On the positive side, he noted that around 200 listed companies have now filed value-enhancement plan disclosures, and that real changes are beginning to emerge, such as high-profile treasury share cancellations by KT&G and SK Inc. In his view, this shows that the government-led Value-up initiative is already producing tangible behavioural changes at some companies.
At the same time, however, he stressed that a troubling trend has also become clear. Some mid-sized chaebol companies, he said, are submitting AGM resolutions that effectively circumvent the intent of the new legislation. Bauernfreund criticised this as "precisely the sort of bad-faith response that risks undermining the credibility of the Value-up programme and only confirms the long-held suspicions of many international investors about Korean corporate governance." It can be read as a warning that if companies continue to look first for loopholes in the law, it will be difficult to expect meaningful reform outcomes.
Bauernfreund also identified formalistic value-up disclosures as a problem. Many of the value-enhancement plans published so far, he said, are effectively boilerplate disclosures and lack the specificity and ambition required to make them meaningful. In some cases, companies are presenting return on equity (ROE), price-to-book ratio (PBR), and payout ratio targets that they are already achieving, which, from the standpoint of the market and shareholders, may amount to little more than exercises in compliance. Bauernfreund stressed that if companies truly want to correct the undervaluation at which their shares trade, the market needs to see ambitious time-bound commitments rather than simple commitments to maintain the status quo.
Asked what additional steps are needed to meaningfully resolve the so-called "Korea Discount," he said the most urgent task is to raise the quality of boards of directors. "Too many Korean boards lack the expertise to provide genuine oversight," Bauernfreund said. "Outside directors drawn predominantly from academia, the judiciary and government are not well-placed to challenge management on capital allocation and scrutinise related-party transactions." In the end, he argued, the current structure gives outside directors the formal appearance of independence, while in practice leaving them unable to put meaningful checks on management decisions.
He also expressed concern that the "rubber-stamping" board culture that has long characterised Korean corporate governance will not disappear easily. Until boards are genuinely independent and appropriately skilled, with a proper understanding of both capital markets and business operations, there is a high likelihood that the practice of effectively endorsing the judgments of controlling shareholders or management will continue. In AVI's view, the essence of value-up lies not simply in raising dividends or cancelling treasury shares, but in changing this decision-making structure itself.
Bauernfreund also assessed Korean companies as still falling well short of global standards in terms of shareholder returns. "Relative to global peers, Korean companies only return a fraction of their earnings to shareholders," he said. "Dividend payout ratios are low, buybacks are rare, and cash accumulates at the holding company level with no clear reinvestment rationale." His point is not so much that conservative cash accumulation is inherently problematic, but rather that the lack of a convincing explanation as to why the cash is being accumulated and how it will be used serves as a source of the market discount.
Bauernfreund believes domestic institutional investors will have to play a bigger role in correcting this problem. He specifically mentioned the National Pension Service, which has recently begun to speak out more publicly, saying it needs to do more to publicly and clearly highlight problematic companies and inappropriate conduct. If companies can circumvent the spirit of the law without facing meaningful consequences, he suggested, the same behaviour is likely to be repeated. In the end, he made clear that Korea's stewardship culture is still not sufficiently developed, and that monitoring and pressure from institutional investors need to be strengthened further.
This perspective is also reflected in AVI's assessment of Youngone Holdings, often cited as one of the representative undervalued stocks in the Korean market. While AVI refrained from commenting on the specifics of its engagement with any individual company, it said of Youngone Holdings that it is "the owner of one of the leading premium garment manufacturing companies worldwide, with a decades-long track record of operational excellence and strong cash generation."
At the same time, AVI stressed that this operational quality is not fully reflected in the company's current valuation, and that further work remains to ensure the company's governance, capital allocation, and disclosure standards are commensurate with the quality of the underlying business and the expectations of shareholders.